OT: IRA Inheritance

[Bulldog Bruce]

I know there are people who deal with this on this board so I am looking for some advice. My mother recently passed and one thing left is an IRA account. I have started reading about the issues on the best way to handle this inheritance but it is pretty general info. Anyone have any advice on what my best course of action would be dealing with this?

 

[Awwhellnaw]

I’m intrigued in feedback on this as well. My father has some of our property tied up in an IRA. Spent his entire career in banking and he still doesn’t fully understand how I’m suppose to “pull it out” when the time comes.

 

[Shmuley]

Bruce, you're calling this an "inheritance." To clarify, are you a named beneficiary of the IRA, or is it passing through her estate?

 

[Bulldog Bruce]

Yes, my two siblings and myself are listed as the beneficiaries.

The info my brother gave me is I will be getting a check of 1/3 of the current yearly draw and 1/3 of the IRA that I have to do something with.

I will be 59 in October if that has any bearing which it seems it might. I see stuff about 59 1/2.

 

[johnson86-1]

I know there are people who deal with this on this board so I am looking for some advice. My mother recently passed and one thing left is an IRA account. I have started reading about the issues on the best way to handle this inheritance but it is pretty general info. Anyone have any advice on what my best course of action would be dealing with this?

This is probably not any better than you have read, but if it's a Roth IRA and you are a named beneficiary and don't need the money right now, roll it into a roth in your own name. If it's a traditional IRA and you are a named beneficiary, just take the required minimum distributions unless you need more than that right now. If there was no beneficiary named and it is flowing through the estate, then I have no clue what to do with it. That may force it to be fully distributed.

Only other thing that might be worth looking into if it's a traditional IRA, if your mother had limited taxable income her last year and you want to spend the money immediately and it's not a big IRA, if you could direct it to be paid out to the estate, that might reduce the taxes owed on it compared to it going to the beneficiary and then being paid out if the beneficiary has decent income. Not sure if it's possible to do that.

 

[Desoto]

This is correct. Most likely you just need to take the RMD and either use the money or if you don’t need the income, roll it into your own brokerage account. Sorry for your loss. I know I am biased bc I am an advisor, but this is where they can help.

 

[dudehead]

If it's a traditional IRA, you will probably want to roll your share (in a direct trustee to trustee transfer) to an inherited IRA account FBO Bulldog Bruce and then take required minimums. Also, The SECURE Act (that in all likelihood will pass Congress when they return) is going to limit "IRA stretches" to 10 years. This may or may not effect you now, but will be something to be aware of because there are other provisions in it that could impact your planning if it passes (most believe it will).

 

[Avelso]

Dudehead, can a Inherited IRA be converted to a Roth? I know it would crush you tax wise but if you don't need the money it would be an option for some....

 

[stateu1]

I know there are people who deal with this on this board so I am looking for some advice. My mother recently passed and one thing left is an IRA account. I have started reading about the issues on the best way to handle this inheritance but it is pretty general info. Anyone have any advice on what my best course of action would be dealing with this?

Only a spousal beneficiary can roll an inherited IRA into one of their own. You will have to take RMD's. The early withdrawal penalty for under 59.5 is not in effect when there is a death.

 

[msjhop]

Tax implications of inherited IRA so be very careful before accepting money

This is correct. Most likely you just need to take the RMD and either use the money or if you don’t need the income, roll it into your own brokerage account. Sorry for your loss. I know I am biased bc I am an advisor, but this is where they can help.

I assume most of your questions have to do with taxability of the inherited IRA. I am also assuming this is a traditional IRA, not a Roth.
You can take your share, regardless of age, in whole this year but be aware you will owe income tax on the full amount. There is no penalty for early withdrawal so your age is not a factor.
if taxes are a concern, you can “stretch” the IRA using your own life expectancy. Basically you set up a decedent IRA and would withdraw at a rate using your life expectancy. At your age of 59, first years RMD would be 1/26.1, or about 3.83%. Next year would be 1/25.1 or 3.98%, etc.
This approach has the advantage of being flexible in that you can take more than the RMD in any given year, or liquidate at any time.
If you choose this approach, be very careful. You cannot “touch” the money, or rollover into your own account. It must be a trustee-trustee transfer. Most institutions, even small town banks, know how to do this.
Another caveat is that there is legislation to do away with the stretch which is likely to pass this year, so you may want to move as quickly as possible.

 

[Bulldog Bruce]

To be clear, The RMD is income to me and taxable at the bracket i achieve with it. Right?

 

[stateu1]

To be clear, The RMD is income to me and taxable at the bracket i achieve with it. Right?

Yes. Nontaxable to Mississippi.

 

[Bulldog Bruce]

One (two) more specific question. I work better with actual numbers.

Let's say the current value of my part of the IRA is $50,000. My current tax bracket is 22%. The 50,000 keeps it in the 22% percent. So if I took the lump sum out of the IRA I would get $39000.

If it knocks me to the next bracket of 24% is it all subject to 24% or the part that is 22% gives up 22 and the rest that is 24% gives up 24?

If these socialist win 10 years from now and pass universal healthcare it will be subject to their tax levels? So could getting it now be beneficial?

 

[johnson86-1]

One (two) more specific question. I work better with actual numbers.

Let's say the current value of my part of the IRA is $50,000. My current tax bracket is 22%. The 50,000 keeps it in the 22% percent. So if I took the lump sum out of the IRA I would get $39000.

If it knocks me to the next bracket of 24% is it all subject to 24% or the part that is 22% gives up 22 and the rest that is 24% gives up 24?

If these socialist win 10 years from now and pass universal healthcare it will be subject to their tax levels? So could getting it now be beneficial?

You will only pay 24% on that income that is above the threshold for the 24% bracket if that answers your first question.

For the second, it could be beneficial, but don't forget that you will lose out on the tax free treatment of gains and will have to pay some taxes each year if you just take the distribution and put it in mutual fund. If you have an investment you want to make that is tax efficient (such as say some real estate), then that's not as big of a deal.

Also, you will have some notice if they are going to raise taxes, so unless you think this year is going to be a relatively low income year compared to what you expect in the next 4 to 10 years, I wouldn't do anything just because of fear of higher taxes later. It could be that instead of ramping up income taxes, they initiate a national sales tax, in which case you don't get anything out of distributing it now. If your income stays roughly the same and democrats sweep 2020, you could take the distribution in december of 2020 as the earliest they could reasonably raise taxes would be for the 2021 calendar year (and even that assumes they take office and immediately pass a tax increase that is essentially retroactive for several months back to the beginning of the year).

 

[TheStateUofMS]

You're going to be subject to the Required Minimum Distributions. You have to open an Inherited IRA.

Normally it's best to create the inherited IRA, take the RMDs every year (called a Stretch IRA) and use the funds to live on, but if you have a lot of debt, I'd advise pulling out enough to cover the debt without pushing you into the next tax bracket and pay some of that down.

A lot of the advice is based on how you feel personally. If someone had a lot of debt and they wanted to pay it off, I wouldn't be opposed to using it for that, just remember if it's a traditional IRA, every dollar that comes out counts as taxable income to you.

 

[TheStateUofMS]

This is probably not any better than you have read, but if it's a Roth IRA and you are a named beneficiary and don't need the money right now, roll it into a roth in your own name. If it's a traditional IRA and you are a named beneficiary, just take the required minimum distributions unless you need more than that right now. If there was no beneficiary named and it is flowing through the estate, then I have no clue what to do with it. That may force it to be fully distributed.

Only other thing that might be worth looking into if it's a traditional IRA, if your mother had limited taxable income her last year and you want to spend the money immediately and it's not a big IRA, if you could direct it to be paid out to the estate, that might reduce the taxes owed on it compared to it going to the beneficiary and then being paid out if the beneficiary has decent income. Not sure if it's possible to do that.

This is good advice. I'm pretty sure if it's a Roth or Traditional IRA is MUST be opened as an Inherited IRA. The only way you could open your own IRA and move the assets into it would be if he's a spouse. I'm fairly certain on this.

 

[dudehead]

No, a traditional inherited IRA cannot be rolled to a Roth.

 

[DawgInThe256]

I can't speak about the best tax strategy, but based on previous experience Vanguard makes it very easy to set up the inherited IRA. They will automatically calculate the RMD and transfer it to another account (say a money market) annually.

 

[hdogg]

One (two) more specific question. I work better with actual numbers.

Let's say the current value of my part of the IRA is $50,000. My current tax bracket is 22%. The 50,000 keeps it in the 22% percent. So if I took the lump sum out of the IRA I would get $39000.

If it knocks me to the next bracket of 24% is it all subject to 24% or the part that is 22% gives up 22 and the rest that is 24% gives up 24?

If these socialist win 10 years from now and pass universal healthcare it will be subject to their tax levels? So could getting it now be beneficial?

I can only speak from my personal experience, but I got an inherited IRA about 10 years ago, have taken the RMD every year, and it's still worth more than when I got it.
Of course market fluctations, etc, blah, but the lump sum definitely could put you in a much higher bracket and hurt badly.
For the RMD, there is a multiplier-table you can find, but for a 40-something, it's about 3 and goes lower as you get older (and eventually becomes "1" so you have to take it all, but will likely die before then)
So for a 100K IRA, you have to take out about 3000/year. For a 300k IRA, it's closer to 10k (just approximate numbers, I'm not an accountant and am too lazy to look up, but this is about right).

So taking 10k extra/year means you pay 2.5K taxes, but (and this is the kicker for me) the 300k can grow and you can take it out and get taxed AFTER YOU RETIRE, when your income is otherwise closer to 0
(or the 3500 gets less than 1k in taxes for the 100k example).
But taking the lump sum on 100k would mean you likely pay 28K taxes now and hope you make it back in another investment of your choosing.

The RMD has worked well for me. If it's a small enough amount the lump-sum may not hurt that bad. But I have a feeling that if it's a small amount, you wouldn't be asking the 6pack
Of course if the socialists ever pass a "one time wealth tax", that would suck, but I'm not a believer that it will really happen.

 

[Bulldog Bruce]

Thanks folks. I think y'all helped clear up my understanding.